What will rezoning do to local tax rates?

November 16, 2003|by Tom Firey

Several recent Herald-Mail editorials have asserted that Washington County's proposed rezoning is necessary to control local tax rates. According to the columns, if development continues under current zoning and regulations, the economic burden on each taxpayer will increase because more schools, roads, public water and sewer, law enforcement, emergency services, etc. will be needed to serve the growing population.

This argument seems sensible; as the local population grows, local government spending must rise to maintain the same level of service. But does an increase in overall spending mean that the burden on each taxpayer must increase? And will the proposed rezoning result in lower tax rates than would occur otherwise? The answers to those questions are much less certain than the editorials assume.

Before I can explain why, I need to correct a misunderstanding about local taxes. It is often claimed that "residential development rarely generates enough tax revenue to pay for the services families require. And unless there's a good portion of industrial and commercial development to take up the slack, too much residential development will mean only one thing - a heavier burden on existing taxpayers."

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It is true that taxes levied directly on residential land and its inhabitants typically do not cover the full cost of local government services consumed by those residents. But that is a trivial truth. Residents pay the balance of that cost in the form of "hidden taxes" levied on employers and merchants who pass those expenses on to residents in the form of lower employee compensation, smaller investment returns and higher prices. Hence, Washington County's residents pay the full cost of local government - they just never see the total tax bill.

Return now to the main question: Will population growth under current regulations produce higher local tax rates as compared to the rezoning proposal? To approach that question, we must first understand the difference between local government's total cost, average cost per person and marginal cost per person.

Assume, for a moment, that Washington County freezes its population at its current level of roughly 134,000. The county's total budget of about $138.6 million represents the total cost of government, which produces a per-person cost of $1,034.

What would happen if the county were to add one more person? Would the cost of government rise by $1,034? If the new person's consumption is typical, the answer is no - one more person can be absorbed into the system without upping outlays for personnel or infrastructure. Hence, the marginal cost (that is, the cost of providing the typical amount of government services to just one more person) is less than the average cost. And, if the level of government services provided remains constant, the per-person cost of government will decrease (albeit extremely slightly) because one more person is sharing the tax burden.

But what would happen if, instead of one person, the county added 11,000 people (the projected growth between now and 2020)? Would tax rates have to rise to maintain local government service levels?

Maybe, maybe not.

If the newcomers largely settle in areas where there is excess capacity in government-supplied services, and their needs for water and waste removal are handled privately through wells and septic, then there probably would be a decrease in the per-person cost of government because the marginal cost would be lower than the average cost. However, if the growth occurs in high-density areas where infrastructure is already at capacity, the per-person tax burden may have to rise to provide for more classrooms, roads, etc.

Then again, it may not. As noted in the county public schools' 2001 Facilities Review Committee Report, 19 of the county's 30 school buildings are more than 30 years old and have not undergone renovation since construction. Hence, the county faces significant school construction costs in the near future, even if the county's population holds at its current level.

Because economies of scale can be achieved in public education without harming quality (at least, to a point), it is quite possible that the per-taxpayer burden of this school construction would be lower if the county were to add capacity when renovating and replacing the old schools. The county could then increase its population, which would fill the expanded schools and add incoming parents to the tax rolls. The result would be a lower per-capita cost of government.